When the city’s minimum wage rises to $18.57 an hour on July 1, the increase will amount to just 53 cents more per hour. But small-business owners say the real cost runs well beyond that figure once payroll taxes, overtime, workers’ compensation and wage expectations from current employees are factored in.
The change can sound modest, but it multiplies quickly. A business with 120 minimum-wage hours per week (three full-time workers or equivalent) faces roughly $3,307.20 a year before related costs.
For owners trying to absorb those numbers, the question quickly shifts from what the increase costs to where to manage it first.
The first place owners should look is payroll, said Dennis Abaca, who provides fractional CFO services through A Squared Bookkeepers in Pasadena.
“I’d start with payroll, it is an immediate cost impact,” Abaca said. “A wage increase affects payroll before it impacts margins, cash flow or pricing decisions.”
According to Abaca, any wage increase also raises payroll taxes and related expenses that many owners overlook until payroll comes due.
Once the true cost is quantified, he said, owners should examine gross margin to see whether labor as a percentage of sales remains viable, then assess whether their weekly, biweekly or semimonthly payroll will strain liquidity before turning to pricing decisions.
Calculating the real cost means accounting for more than the hourly bump, Abaca said. He advised owners to include federal and state payroll taxes, the workers’ compensation rate and other payroll-related expenses such as employer-paid health insurance, retirement plan contributions and processing fees.
“Any wage increase has a high chance of also increasing payroll-related expenses,” he said.
Faced with those costs, owners can model a range of responses, including adjusting prices, trimming hours, cross-training workers, changing schedules or absorbing the increase.
Abaca said he commonly sees a mix of bookkeeping errors after wage changes. Owners who handle their own payroll often fail to update every employee profile in their payroll software, he said, and mid-cycle changes can force retroactive corrections. Weak record-keeping stems from missing documentation of new wage policies, he said, and poor job-cost tracking can lead to labor being allocated incorrectly across jobs or departments.
He also pointed to wage compression as a hidden issue. Employees already earning slightly above minimum wage — around $18.75 or $19 — may expect raises when entry-level workers move up to $18.57. Failing to adjust pay for higher-skilled employees “leads to low morale and retention issues,” Abaca said.
On whether to raise prices or absorb the higher labor costs, Abaca said owners who put customers first weigh several factors before deciding. Those include what share of operating costs goes to labor, whether margins were already thin, how price-sensitive customers are, and whether the increase can be offset in other ways — such as implementing more efficient processes, creating new offerings or cutting low-margin, low-demand items.
In the first two pay periods after July 1, Abaca recommended owners confirm that every employee’s rate is updated correctly and that payroll taxes and related expenses reflect the new wages. Overtime, which is calculated from the higher base wage, should also be checked. He advised owners to monitor cash flow and compare margins against previous months to catch problems early.
A Squared Bookkeepers is located at 157 South Fair Oaks Avenue, Suite 1008, in Pasadena.
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